Gross Income

Gross Income Meaning

Gross income is the profit margin earned by a company from its operating activities and is denoted as sales as reduced by the cost of goods sold, which means the cost associated directly with the sale of goods sold by the company.  It represents that income which an entity earns without incurring non-operating expenses such as interest, rent, electricity etc. It is reflected as a separate item in the income statement of the company as per GAAP.

Calculation

Gross Income Formula = Revenue – Cost of Goods Sold (COGS)

It can be calculated by reducing the cost of goods sold from the revenue of the entity.

The cost of goods sold refers to the direct cost that is incurred for the production of the goods. It includes the cost of material, labor, packaging, freight cost, and other direct costs.

All non-operating expenses are excluded from calculating it, and the only production linked expenses are taken into consideration.

Gross Income

Examples of Gross Income

Let us understand the calculation by way of the following examples.

You can download this Gross Income Excel Template here – Gross Income Excel Template

Example #1

A company engaged in the sale of motor parts earned a revenue of $10,000 during the year.  The company incurs the following expenses during the year.

Solution

Given,

  • Raw Material Cost: $3,000
  • Labor Wages: $4,000
  • Sales Commission: $500

Calculation of Cost of Goods Sold can be done as follows,

Gross Income Example 1

COGS formula = Raw Material + Labor Cost + Sales Commission

  • = $3,000 + $4,000 + $500
  • = $7,500

Calculations

Gross Income Example 1.1

  • = $10,000 – $7,500
  • = $2,500

Example #2

A company involved in a trade of goods managed to earn revenue of $ 12,000 during the year. Also, the following extracts of the company’s books of accounts are given.

Solution

Calculation of Cost of Goods Sold can be done as follows,

Gross Income Example 2

COGS = Raw material + Labor cost + Freight

COGS  = (Opening Stock + Purchases – Closing Stock) + Labor Cost + Freight

  • = ($300 + $3,000 – $250) + $5,000 + $500
  • = $8,550

It is to be noted that salaries and interest expense will not form part of COGS are these are not directly related to the production of the goods.

Calculation

Gross Income Example 2.1

  • = $12,000 – $8,550
  • = $3,450

Gross vs. Net Income

  • Gross income means the amount of profit that is earned by the company from its business before incurring the indirect expenses. Net income represents the profit that is left after reducing the indirect expenses such as salary, rent, interest, rent, etc.. It can be calculated as follows:
Net Income = Gross Income – Expenses
  • It represents the income earned from the main business. Net income reflects the overall income of the business after reducing all expenses. Net profit includes the effect of all expenses. It is not limited to just direct expenses, as is the case in gross income, which considers the cost of goods sold, i.e., the expenses related to the production of goods. An income statement shows revenue and cost of goods sold, followed by gross income, and after other expenses, net income is shown, which is a bottom-line item in the balance sheet.
  • Analyzing it gives an idea if a company needs to increase the product price or reduce the product-related cost to increase its gross income. On the other hand, if the net income of the company is very low as compared to gross, it may suggest that the company needs to cut its other expenses. It does not take into account other incomes, and it considers only the revenue from the sale of goods and services. In comparison, net income takes into account other incomes as well, such as interest income, dividend income, etc.

Conclusion

Gross Income is an indicator of the company’s profitability of its primary business. It is an essential factor that is considered by the stakeholders while evaluating the company as it reflects how effectively a company is managing its affair. It represents the profit earned from the main business of the company.

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